New GASB standard on termination benefits: despite certain similarities, there is at least one crucial difference between postemployment benefits and termination benefits: the cost of postemployment benefits is properly recognized over an employee's active service, whereas the cost of termination benefits is not.

• Author: Gauthier, Stephen J.
• Position: Governmental Accounting Standards Board

Last year, the Governmental Accounting Standards Board released the final elements of a comprehensive framework of accounting and financial reporting for pensions and other postemployment benefits. This year, the GASB completed a similar effort involving termination benefits, as marked by the recent release of GASB Statement No. 47, Accounting for Termination Benefits.

BACKGROUND

Despite certain similarities, there is at least one crucial difference between postemployment benefits and termination benefits. Postemployment benefits are a form of compensation for prior service, whereas termination benefits reflect the cost of discontinuing employee service, either voluntarily or involuntarily, earlier than planned. Accordingly, the cost of postemployment benefits is properly recognized over an employee's active service life, whereas the cost of termination benefits is not. Common forms of termination benefits include the following:

* Cash payments

* Healthcare (including mandatory access to employer-sponsored healthcare pursuant to the provisions of the federal Consolidated Omnibus Budget Reconciliation Act, or COBRA)

* Severance pay

* Career counseling and outplacement services

The cost of termination benefits includes not only the direct cost of the benefits themselves, but also the cost of any related fringe benefits and any resulting increase in the cost of other benefits (e.g., the reimbursement of unused sick leave at a higher than ordinary rate).

There is one crucial exception to the rule that related increases in the cost of other benefits should he treated as part of the cost of termination benefits. Specifically, increases in defined-benefit pension and OPEB costs resulting from earlier-than-planned separation or retirement are properly handled as part of the calculation of the cost of pensions or OPEB rather than as part of the cost of termination benefits.

MEASURING COST

GASB Statement No. 47 distinguishes healthcare-related termination benefits from other types of termination benefits. (Furthermore, healthcare-related termination benefits that are offered through an existing defined-benefit OPEB plan are to follow the authoritative guidance governing OPEB plans rather than the provisions of GASB Statement No. 47).

The accrued liability for healthcare-related termination benefits should be calculated based on the discounted present value of expected future benefit payments. That estimate normally should be based on either total...